I’ve been wondering about the impact of student loans setting a financial pattern for so many people in the Millennial and Gen Z generations.
While any debt taken out at a young age can set a pattern for debt use in the future, student loans are specific to those going to college – so usually a younger demographic.
Most people I knew in college (I’m a Millennial) took out student loans. What I have seen online and in real life looks to me to indicate that taking on student loans tends to start a pattern of taking on debt for other things in life like a car, a vacation, etc.
I don’t think student loans in themselves are bad and there are situations in which they can be useful, but as with any debt, the mindset behind them is important to evaluate.
Student Loan Uses in College
There isn’t too much information about student loan money used for tuition versus living expenses.
I’m guessing that is because the amount is all wrapped up in the same loan. When you apply for a student loan, the college takes the cost of tuition and fees and refunds the rest to you.
However, student loan money can be used for living expenses. While there are recommendations on how that money is to be spent, it is ultimately up to the student where that money goes.
Starting adult life living on debt
Thinking about student loans, you have to sign for them from the age of 18 to your early 20s.
Unfortunately, loan documents can be confusing and many people at that age don’t understand just how much interest can accrue (I know I didn’t – I just knew I didn’t want it!)
I worked in the financial aid office in college, and from what I gathered, financial aid officers mainly communicated how much student loan money a student was offered and how to plan for borrowing limits. I don’t know how much conversation there was around interest and a loan payoff plan.
Average student debt
Of the 43+ million Americans who hold student loans, the average balance is almost $38,000 as of March 2024.
Getting into a cycle of debt
It’s easy to get accustomed to a certain way of life in college – with the help of debt.
However, life and needs change with your first job. There can be more expenses if you need to move and are now living alone.
It’s normal to get a car loan when you buy a car.
It’s normal to finance furniture or appliances for your first house or apartment.
It’s normal to treat yourself after getting your first job with a nice gift or trip.
But these normal things start to perpetuate the pattern of debt.
It can also feel shameful if you’re living paycheck to paycheck as a result.
Taking on a Mortgage
While most expenses in life can be managed without debt, if you want to own property, getting a mortgage is almost always required – unless you are very aggressive with saving (kudos to you!)
Even though you will most likely need a mortgage when you go to buy a house, you need to be the one determining what you can afford.
A mortgage lender is only considering how much debt you currently have, your credit score (how well you are at paying back debt), and your current income.
We were approved for a mortgage at almost 3x of what our self-determined budget was. If we had gotten a mortgage at the upper end of our pre-approval, we could not have afforded the payments with any of our other financial goals.
Debt is Stressful
About half of adults with debt feel stressed out by it.
Debt can feel messy and difficult to think through. Taking a step back and making a plan to pay it off is stressful because you have to face it.
However, being debt-free is an integral piece of financial freedom. So, it is worthwhile to make a plan. Here’s a simple guide to creating a plan to get out of debt that works for you.
Steps you can take to get OUT of the cycle of debt
The first step is committing to breaking the cycle of debt. If you are married, this is a conversation you and your spouse should absolutely be on the same page about.
Create a budget
Figure out exactly where your money is coming from and exactly where it is going. Here is a step-by-step guide to setting up a simple budget in Excel.
Create a debt payoff plan
Create this plan in the context of your budget. Here is a step-by-step guide to figuring out the best method for you to pay off your debt and stick with it.
Organize your money
If your loans, investment accounts, and savings accounts are all over the place, check out this guide for getting all the information in one place.
